Anacomp Case
15 september 2010 Externe Verslaggeving 1
Assignment 1
Hanna Zaitsava
5686377
1) Identify all the economic entities involved in the development of Anacomp’s CIS software system: * Parternship with RTS Associates * Officers and directors of Anacomp (total ownership amounted to 38.5%) * 13 major banks participated as advisory banks to review the project
2) Describe the contractual arrangements between the economic entities involved in the CIS development. Who bears the majority of the risk of failure of the development effort? Who stands to gain most if the development effort succeeds? Are Anacomp’s shareholders better off or worse off with this arrangement, relative to in-house development of the system?
RTS pays a development fee of $6 million, of which (1) $1.444 million was invested by the partners, (2) $3.25 million was a bank loan to RTS, (3) and $2.2 million was lent by Anacomp. Furthermore, if the development expenses exceeded $6 million, Anacomp would loan up to $1.5 million to complete the CIS system. Anacomp had the option to acquire all rights to the CIS system at the greater of its appraised fair market value or RTS’s investment plus a fixed profit and agreed to market CIS for 5 years on a commission basis. Officers and directors of Anacomp owned 38.5% of shares in RTS. 13 banks contracted to advise on the CIS project for a nonrefundable fee of $150000 each. Upon the completion of CIS development Anacomp purchased it from RTS for $16 million. The majority of the risk was born by RTS. In case the development succeeded Anacomp would gain the most. Anacomp shareholders are better-off with this arrangement as it would be more expensive for them to develop the system in-house.
3) What criteria will Anacomp’s management use in deciding on whether or not to buy back the CIS system from RTS Associates? Is Anacomp’s management likely to be unbiased in deciding on the timing and the price of the purchase? If not, what will be the
Assignment 1
Hanna Zaitsava
5686377
1) Identify all the economic entities involved in the development of Anacomp’s CIS software system: * Parternship with RTS Associates * Officers and directors of Anacomp (total ownership amounted to 38.5%) * 13 major banks participated as advisory banks to review the project
2) Describe the contractual arrangements between the economic entities involved in the CIS development. Who bears the majority of the risk of failure of the development effort? Who stands to gain most if the development effort succeeds? Are Anacomp’s shareholders better off or worse off with this arrangement, relative to in-house development of the system?
RTS pays a development fee of $6 million, of which (1) $1.444 million was invested by the partners, (2) $3.25 million was a bank loan to RTS, (3) and $2.2 million was lent by Anacomp. Furthermore, if the development expenses exceeded $6 million, Anacomp would loan up to $1.5 million to complete the CIS system. Anacomp had the option to acquire all rights to the CIS system at the greater of its appraised fair market value or RTS’s investment plus a fixed profit and agreed to market CIS for 5 years on a commission basis. Officers and directors of Anacomp owned 38.5% of shares in RTS. 13 banks contracted to advise on the CIS project for a nonrefundable fee of $150000 each. Upon the completion of CIS development Anacomp purchased it from RTS for $16 million. The majority of the risk was born by RTS. In case the development succeeded Anacomp would gain the most. Anacomp shareholders are better-off with this arrangement as it would be more expensive for them to develop the system in-house.
3) What criteria will Anacomp’s management use in deciding on whether or not to buy back the CIS system from RTS Associates? Is Anacomp’s management likely to be unbiased in deciding on the timing and the price of the purchase? If not, what will be the